For Hungary's capitalists, sky's almost the limit

By
William Echikson, Staff writer of The Christian Science Monitor /
November 3, 1988

Budapest

Hungary is taking a giant, if little-noticed, leap toward letting capitalism out of the closet. While Yugoslavs and Poles steal the headlines with dramatic unrest on the streets, Hungarians have enacted a new company law, to take effect next year, aimed at freeing private enterprise and foreign investment. Similar good intentions in the past have been undermined by bad execution. But no one can deny the whiff of entrepreneurial enthusiasm in Budapest.

Private companies such as Rollitron Electronics are working hard to prepare for the changes. When Rollitron began, in 1981, it could employ only 30 workers. The new law permits it to hire up to 500, sell to Western investors, and even raise capital on the new Budapest stock exchange.

Hungarian National Bank officials say that in a few years the private sector could account for as much as one-third of gross national produce. The new law lets Western companies buy 100 percent of Hungarian firms; if CBS wants to buy the excellent Hungarian Recording Studios, officials exult, ``all the better.'' Soviet perestroika (restructuring) doesn't go nearly so far.

Hungary's reform pace accelerated after last May's ouster of Janos Kadar, Communist Party chief since 1956. Mr. Kadar started Hungary off on reform two decades ago, injecting some market elements into the centrally planned system. But he stopped halfway, fearful of offending Moscow and his conservative backers.

Mr. Gorbachev's perestroika has removed the Soviet veto, and Kadar's successor, Karoly Grosz, won power by making an alliance with radical reformers Imre Pozsgay and Rezso Nyers, both of whom were appointed to the ruling Politburo.

``I have to admit, the personnel changes went far beyond what the reformers were hoping,'' says banker Ipper. ``All of a sudden, the order came, `Go ahead, do whatever you need to, the sky's the limit.'''

Skeptics still fear that restraining clauses will sabatoge the new company law. Before registering a limited company, private entrepreneurs must have a starting capital of $19,000 (six years' average pay) and, even if the state guards only a third of shares, it will retain majority control with 51 percent voting rights.

``The state will keep control of the leading heights of industry,'' says Miklos Pulai, Central Plan director and a reformer. ``It will take time to establish a true market.''

An $18 billion debt and an 18 percent inflation rate, represent additional constraints. The root problem, says V.N. Rajagopalan, World Bank country officer for Hungary, are huge state subsidies ($3.8 billion, or 60 to 65 percent of the 1988 budget). Profitable companies fund these subsidies by paying 50 percent tax on profits, which combined with other taxes and welfare contributions has many firms paying almost 100 percent of their profits to the government.

An estimated 40 percent of state-owned companies are losing money. The worst culprits are huge coal mines and steel mills. Closing them down is sure to result in a sharp rise in unemployment.

``The atmosphere is delicate and dangerous,'' warns Miklos Vasarhelyi, Prime Minister Imre Nagy's spokesman back during the 1956 revolution and now a leading member of the democratic opposition. He sees a similarity between the public mood now and then. ``Just like then, a malaise lies just under the surface.''

No matter the risks, the new Grosz regime is pressing ahead. At the loss-making Lenin Steel Mill in Leninvaros, general manager Laszlo Drotos says he has laid off 4,500 of his 14,500 workers in recent years. Half of the rest could be laid off in the next two years.

``There could be terrible social consequences,'' Mr. Drotos admits. ``But we must have efficient employment.

Early this month, the government must decide between two macroeconomic plans. Officials expect to choose the riskier plan, which calls for cutting subsidies in half by 1991, fast plant closings, borrowing for new investments, and higher unemployment and inflation.

The gamble is that entrepreneurs will step in, soak up the newly unemployed, and put a brake on inflation by stimulating competition. In the depressed coal-mining town of Miskolic, Zoltan Csomai has set up a sort of venture-capital fund to finance private firms called the Innovation Center. He says more than 15 companies plan to raise capital under the new law, everything from a computer software venture to a honeymaking concern. ``Innovation is ready to explode in this country,'' he says. ``This law gives us the necessary opportunities.''

Rollitron owner Steiner agrees. Until now, his firm has been owned by the employees. He plans to stimulate growth by organizing a joint venture with a West German company. In the future, he says, he will consider launching an issue on the stock market.

``A share company, it sounds wonderful,'' he enthuses. ``It used to be so difficult for private companies.''